The "shaky hand" trade. That tells you all you need to know. If you're still taking "comfortable" trades, you're setting yourself up for failure. Here's how to know the difference and how to capitalize on them.
"A valuable virtue to learn from your commodity broker is courage. He is doing his job if he shows you how to take on the risk of futures contracts and to write options properly. He is not worth his salt if he always steers you into "safe" trades like buying options, or spreads that are so complex there is no risk or opportunity. To trade "risk-free" all the time is the sure road to mediocrity and eventual loss. The biggest risk in commodity trading is being afraid to take on calculated risk."
- Thomas Cathey
This subject is probably considered advanced, but I want to give novice commodity futures traders some interesting goals to aim for in the futures contract market. This subject addresses an important skill to master. There’s a trade I call the “shaky hand” trade. It’s when you’ve done your homework, but your hand still shakes when you click the mouse to send it in. Or the telephone handset rattles against your head as your heart pounds when you call your futures broker. This is a good sign that you may be doing the right thing.
In contrast, when we feel smug, cracking our knuckles and wondering how many more contracts or options we can afford to add, watch out! This is probably the “comfortable” trade the crowd loves. It may mean you have lots of company. (not a good thing in trading)
I believe we are all very much similar, so we tend to see and do the same things. If it feels good, it’s probably wrong. If it’s painful to do, it’s probably right. Notice I use the word, “probably” a lot. That’s because we must learn to think in probabilities when we trade.
My point is to figure out what would be the hardest thing to do when entering a trading situation. What does the majority NOT want to do? What are they afraid of right now? We need to look for commodity market situations that are vulnerable. These are the situations where the majority has hung their hats on the obvious.
The obvious things are long established trend lines, prices hugging moving averages, dull trending markets that are getting old, days when the advance-decline line is one sided down with bottoms forming, creeping futures contract markets that are about to explode, etc. There’s many more. You can usually find them by simply asking yourself, “Does this look like a “sure-thing” trade? If so, maybe it's a vulnerable situation to be exploited by taking the OTHER side.
Part Two of Three, Next!
There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.
